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What Does Prime Mean to Amazon.com?

Amazon's membership program is a key reason that the company is now one of the most valuable in the world.

Amazon.com (NASDAQ:AMZN) is easily the fastest-growing retailer in the country, as the company is on track this year to add more than $15 billion in retail sales in North America and more than $23 billion globally.

Amazon's surge comes as traditional retailers are struggling. Department-store chains like Macy's have seen sales slide, and mass merchandisers such as Wal-Mart(NYSE:WMT) are searching for new growth outlets as sales at established stores have been stagnant.

More than anything else, Amazon's strong growth and dominance in e-commerce can be attributed to its Prime membership loyalty program.

What is Prime?

Launched in 2005, Prime was the company's attempt to build a loyal customer base and eliminate the hassle of long delivery waits and shipping fees. For $79 a year, Amazon offered free two-day shipping on tens of thousands of items; in 2014, it raised the annual rate to $99. Over the years Amazon has piled on benefits, including access to its streaming service Amazon Prime Video, use of the Kindle Lending Library, unlimited cloud storage for photos, and others.

Amazon is tight-lipped about its membership numbers, and other statistics about Prime use such as average spending, but the company's efforts to push Prime adoption make it clear that it is the most important component of its e-commerce strategy.

In addition to stuffing Prime with additional benefits, Amazon has taken up initiatives like Prime Day, the annual summertime shopping holiday it launched last year to give Prime members Black Friday-like deals. It's also doubled down on speedy delivery with Prime Now, which provides delivery in as little as one hour to some cities. And for years the company has been teasing Prime Air, its drone delivery service, though the Feds have yet to approve drones for such a use.

Amazon has concurrently made things tougher for non-Prime customers, as it raised its free-shipping threshold for those customers from $35 to $50 earlier this year, and slowed its shipping speed.

While Amazon doesn't give data on Prime membership, the research firm Consumer Intelligence Research Partners estimates that more than half of Amazon's U.S. customers are now Prime members. According to the research group, 63 million Americans were Prime members, spending an average of $1,200 a year versus $500 a year for non-Prime members. Assuming each member pays a $99 annual subscriber fee, that would generate $6.24 billion in revenue -- or more than 5% of the company's total -- on Prime fees alone.

Why Prime is so important

With Amazon's annual sales now over $100 billion, its brick-and-mortar competitors have taken notice. Wal-Mart has made e-commerce a priority, with increased investment, its recent acquisition of Jet.com, and a Prime copycat offering called ShippingPass. Target has responded by lowering its free-shipping minimum to $25, the lowest of any retailer.

However, competitors are going to be hard-pressed to catch up with Amazon. The company's tens of millions of Prime customers give it a competitive moat, incentivizing current customers to shop at Amazon and take advantage of their membership, rather than sample a rival's offer. Prime's renewal rate is also reported to be above 90%, indicating high customer satisfaction with the service.

The competitive advantage from Prime helps explain why the company has poured so much money and effort into expanding the service, as Prime is the best way for the company to grow sales and to maintain its leadership in e-commerce.

Expect Prime to become even more appealing in the coming years, as CEO Jeff Bezos has said: "We want Prime to be such a good value, you'd be irresponsible not to be a member."

Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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